Big Gains for Small Hedge Funds in Tough Times

Big Gains for Small Hedge Funds in Tough Times

Although hedge funds have been trailing the U.S. stock market this year, some of the smallest are emerging as top performers. This according to a recent article in The Wall Street Journal.

“Funds with less than $1 billion in assets are benefiting from their more manageable portfolios,” the article said, explaining, “They can dart in and out of holdings to protect gains or minimize losses amid the market volatility that has characterized this year. They also get more bang for their buck—making investments that require less firepower to affect their overall performance.”

Such agility is in demand, the article notes, as some investors were “too nervous between March and June to take chances on small funds they hadn’t done due diligence on.” However, as lockdowns lifted and people adjusted to work-from-home, “requests for boutique managers rose 22% in the third quarter” compared to the same period in the prior year.

As of October 31st (the most recent data available), funds with less than $250 million in assets returned 1.12% (data from eVestment), putting them ahead of the world’s 10 largest hedge funds, which were down 1.85%. Funds with more than $1 billion in assets were reportedly down by 2%.

The article cites academic research from 2015 showing that on average between 1995 and 2014, “smaller hedge funds performed better during crises.” A 2019 paper found that as funds get bigger, their income from management fees increases, which gives managers fewer incentives to improve performance.”